We're still six weeks away from Rachel Reeves' Autumn Statement, scheduled for 30th October. And the new Chancellor has warned of difficult decisions to come with a ￡22bn fiscal hole left by the previous government.
This has whipped up a media frenzy of potential tax increases - we've gone full blown ‘budget bingo’!
Here's a list of all the rumoured tax hikes that we've come across over the last few weeks. There are a lot (and we’ve probably missed quite a few too):
Income tax & National Insurance
- Labour have previously ruled out increasing National Insurance, Income Tax or VAT. But there’s still speculation they might increase employer NI contributions from the current 13.8%,
- Fiscal drag – a continued freezing of income tax bands (i.e. the thresholds at which you start to pay higher and additional rate tax) seems a near certainty,
- Carried interest (the capital share of profits on a managed investment fund that is allocated to the fund executives) to be taxed as income, not as a capital gain.
Capital gains tax
- Equalisation with income tax, implying an increase from the current Capital Gains Tax ‘CGT’ rates of 10% (18% on residential property) and 20% (24% on residential property) to 20% (basic rate taxpayers), 40% (higher rate) and 45% (additional rate). There is speculation that this could come in overnight on 30th October, otherwise, its impact will be diluted as many will look to sell chargeable assets before tax year-end,
- This might come with some form of Indexation Relief – i.e. you’d only pay tax on gains in excess of inflation,
- A removal/reduction of Business Asset Disposal Relief, whereby entrepreneurs pay tax at 10% on the first ￡1m of gains when they sell their business,
- A removal of ‘holdover relief’ when gifting shares in a Family Company to children – this ensures no CGT is payable on the lifetime transfer and the children inherit the shares at the original base cost,
- More extreme views have suggested that the Main Residence Relief (no CGT due on the disposal of your main home) could be at risk, or that this could be capped at somewhere between ￡500k-2m,
- There’s also speculation that the ‘CGT reset on death’ could be abolished, whereby assets are deemed to be inherited at their value on death, rather than the original acquisition cost, resulting in CGT being effectively reset to zero.
Pensions
- A reduction in tax relief for higher and additional rate taxpayers, switching to a uniform rate across all brackets, say 20, 25 or 30%,
- A reduction in tax-free cash from the current limit of ￡268,275, to somewhere between ￡100-250k,
- Inclusion of pension savings inside your estate, where they’ll become liable to inheritance tax (potentially, with an additional nil-rate band of say ￡100-250k),
- A reduction in the annual allowance – the amount you can contribute to a pension each year and receive tax relief. This is currently set at ￡60k a year, but tapered for those with ‘Adjusted Income’ of more than ￡260k. There’s also speculation that Labour might remove the ability to carry forward unused allowance from the previous three tax years,
- An increase in the Minimum Pension Age from the current 55 (already due to rise to 57 by 2028). Some are suggesting this could go to 60, albeit with some lead time into this,
- Imposing an annual maximum to the National Insurance exemption on employer pension contributions, to say ￡10k a year or 20% earnings. This is currently an extremely tax efficient way to extract profits from a business as any employer pension contributions are classed as a deductible business expense,
ISAs
- A reduction in the ISA allowance from the current ￡20k to either ￡10k or ￡15k,
- The British ISA (extra ￡5k allowance to invest in the UK) has already been shelved.
Inheritance tax
- A reduction in the nil-rate band (the value of your estate that can be inherited tax-free). This is currently set at ￡325k,
- A reduction/removal in Business Relief and/or Agricultural Relief, whereby certain assets are partially (50%) or fully exempt from inheritance tax after a holding period of two years. There is also speculation that the government might tighten the eligibility criteria, with AIM-listed shares being the obvious target,
- Progressive IHT bands starting at say 25% and rising to 50% for larger estates,
- An increase in Relevant Property Trust periodic and exit charges, currently set at 6%.
Others
- A reform of Council Tax, including a potential percentage charge, say 0.5% of the value of your home –? a Wealth Tax in disguise. The challenge here is that this would require a revaluation of every house in the UK, which would take some time,
- Increasing the Stamp Duty surcharge for overseas buyers of UK property by 1%.
Planning opportunities
For those intending to ‘max out’ ISAs and pensions in the current tax year anyway, we’d suggest bringing these plans forward. Overnight legislative changes are rare – it’s more likely these would be introduced for the start of the 2025/26 tax year – but not out of the question.
There’s also a ‘conversation to be had’ around capital gains. For those able to crystallise gains and pay the lowest rate of tax on these, i.e. 10%, there’s a reasonable argument for bringing forward a planned sale to bank the current rates. Albeit this very much depends on personal circumstances – one should seek advice.
Otherwise, we recommend ‘sitting tight’ and waiting for the details.
Disclaimer: The Financial Conduct Authority does not regulate tax advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
‘Don't let the tax tail wag the investment dog’
Given the flurry of media attention and the Labour narrative around tough decisions to come, it's no surprise that clients are nervous about the Autumn Statement and the potential for tax increases.
We'll probably get some of the rumoured changes summarised above but certainly not all of them.
I also believe there’s a reasonable probability of Labour dampening expectations now, to deliver something that is less bad than feared. And bear in mind that tax is ultimately a choice – if the tax system becomes too punitive, more people will look to relocate abroad, to the detriment of the UK economy which desperately needs an injection of growth.
Furthermore, tax hikes aren’t the only way to fill the identified ￡22bn fiscal hole – the government will also target some spending cuts, but also potentially borrow more.
As the saying goes, it's important not to let the tax tail wag the investment dog.
I intend for this to be the last pre-budget blog unless something major changes. But we'll naturally be tuning in to the main event and following up with the key details and any planning opportunities shortly after.
